Jonas Severin Frank ‘Patent Settlements in Europe and the Lundbeck Case: A Competition Law and Economics Perspective’

This paper is part of a dissertation at the University of Marburg, and can be accessed here. While it focuses on developing an economic perspective on the Lundbeck decision, it is fairly similar to the paper reviewed in the post above – except that it concludes that a presumption of illegality of reverse payments in patent settlements, and a safe harbour rule for agreements without reverse payments, should be adopted.

The paper is structured as follows:

First, it provides an overview of the patent settlement debate in the economics literature. This includes a review of various economics papers and models that identify when and how a reverse payment from the branded drug originator to the generic provider has the ability to delay market entry and, thus, harm consumers through longer periods of monopoly pricing.

The whole debate flows from discussions on the probabilistic nature of patents – and was ultimately triggered by Shapiro’s work on how, under a consumer welfare standard, consumers are entitled to the same level of welfare under a settlement agreement as in a scenario where a patent’s validity is tested in court. Economists have built on this insight and developed various patent settlement models. These models usually assign levels of expected strength to a patent, derived from the probability of the patent being found valid in court. With time, these models have become progressively more complex. In particular, the models have incorporated innovation incentives, incentives to challenge a patent, and price effects. Some models have also sought to reflect the impact of the institutional framework on the behaviour or patent originators and generic producers.

The paper then reviews patent settlement policy in Europe, with a focus on the Commission’s pharmaceutical sector inquiry and its follow-up studies. This section also discusses how the Commission’s guidelines on technology transfer agreements deal with patent settlements and pay-for-delay cases.

The main body of the article is devoted to analysing the Lundbeck decision, which is done is great detail. It concludes that, despite its finding that the reverse settlement payment in this case was a restriction by object, the Lundbeck decision was ‘an exemplary application of an analysis of price effects in patent settlements’ – in particular in its assessment of the relevance of potential competition, of the value of the reverse payment, of the implications of the bargaining process to competition assessments, and of how innovation and patent challenging incentives must be taken into account. This section also reviews how the framework deployed in Lundbeck fits within broader EU competition policy as regards reverse payment settlements.

A fifth section looks at the U.S. patent settlement debate, and compares it with the EU regulatory framework, in terms similar to those in the article reviewed above. It also reaches similar conclusions, namely that: ‘there are not many differences in actual patent settlement polices in the U.S. and the EU [even if] the regulatory framework is very different.’

The paper concludes with a discussion of how to proceed with competition assessments of patent settlements. It is argued that safe harbours should be adopted for patent settlements where there are no reverse payments, or where generics are not close to market entry. In other cases, a structured rule of reason should be adopted; potentially, it may be justified to adopt a rebuttable presumption that reverse payments are anticompetitive, particularly if potential generic entry is affected.

Comment: As noted above, this paper is fairly similar to the one reviewed in the post above. It is not as clear regarding the regulatory frameworks underpinning patent settlements in the pharma sector in the US and the EU, or as regards their implications for competition law. Nonetheless, this paper is likely to prove more interesting to anyone seeking to understand the economic theories and models applicable to this topic. It is also a more ambitious paper, particularly in how it attempts to structure a legal test for pay-for-delay agreements – a topic on which I am unable to comment at present, but to which I would like to devote some thought.